Tuesday, January 11, 2011

I just received the following email from a lender I work with very closely. This is yet another "Big Bank" move that penalizes many people, even if they have great credit. (And we all know how I feel about banks) While I don't particularly think this will have a huge negative impact on our real estate market, I certainly don't think it is going to help matters as we delve into 2011. So, if you've been shopping for a loan, and don't plan on putting down at least 25%, I highly recommend you call your lender immediately and lock-in your rate!

I wanted to send an urgent email advising that rates are essentially going up for all conventional loan clients tomorrow and this is not the result of daily market action. All lenders, including me, will be subject to the new rate structure on conventional loans.

Fannie Mae and Freddie Mac will institute new “risk based pricing” adjustments to rates essentially for all buyers who don’t put at least 25% down regardless of how high their credit scores are. (You read correctly.) The mortgage giants, which account for 75% of the mortgages in the United States, have leveled these “risk based pricing” adjustments in the guise of charging a premium to those that didn’t take care of their credit and “rewarding” those that did. The issue is they seem largely punitive in nature, even for A+ credit individuals. Additionally, anyone with less than a 740 credit score can expect to see the rate rise exponentially the closer the score is to 620. For example, a buyer with a 699 credit score would see a rate that is around .5% higher EVEN WITH 20% down!

The bottom line is the overwhelming majority of conventional home loan applicants will see their rates go up effective tomorrow, Wednesday, 1/12/11. Since rates are still at historic lows, the true effects of this won’t be as drastic. As the rates start to rise due to market forces, this could become a significant impediment to home purchases whereby otherwise qualified and ready homeowners are forced to rent. While no one will disagree that sensible lending practices from Fannie Mae and Freddie Mac must be utilized, there may come a time where we make our voices heard about the potential negative effects on our nations recovery as a result of this action.